Daybreak Weekend: US Housing, Europe Data, Yen Intervention

0:00Bloomberg Daybreak U.S. Edition is brought to you by OTC Markets Group. OTC Markets' overnight platform for exchange-listed securities, Moon ATS, provides access to global securities in U.S. dollars from 8 p.m. to 4 a.m. Eastern, Sunday through Thursday. Learn more at otcmarkets.com slash moon. Moon ATS is operated by OTC Link LLC, a FINRA-registered broker-dealer, and is available only through participating broker-dealers. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work.

0:47Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. Next week on Leaders with me, Francine Lacqua. I speak with Harvard Business School professor Linda Hill about what CEOs need to know to be successful. It really is not about them. It is about the organization. About how to lead in the age of AI. That requires a lot of confidence. And why great leaders embrace conflict. You need to amplify difference. Listen and watch Leaders, the podcast with me, Francine Lacroix, on Bloomberg TV or wherever you get your podcasts.

1:30Bloomberg Audio Studios, podcasts, radio, news. This is Bloomberg Daybreak Weekend, our global look at the top stories in the coming week from our Daybreak anchors all around the world. Straight ahead on the program, we look to some key housing data in the U.S. I'm Nathan Hager in Washington. I'm Stephen Carroll in London. We're looking ahead to the next economic indicators for Europe and what it signals about the trajectory for stocks and the economy for the rest of the year. I'm Doug Krizner looking at the fate of the Japanese yen and a reality check for Hong Kong. That's all straight ahead on Bloomberg Daybreak Weekend.

2:09On Bloomberg 1130 New York, Bloomberg 99.1 Washington, D.C., Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

2:29Good day to you. I'm Nathan Hager. We begin today's program with a look at the U.S. housing market. This week, we get figures on housing starts and pending home sales for the month of July. For more on this and the latest in the home building sector, we are joined by Drew Redding, U.S. Home Building Analyst for Bloomberg Intelligence. Great, as always, to speak with you, Drew. And, of course, it's been a pretty hot summer. So are we expecting many projects to have gotten off the ground in the last month? So when we think about housing starts, we're down about 5 % year to date on the single family side, and we expect to see further pressure from that side of the market.

3:06We see builders that are continuing to scale back production, giving in an already elevated supply of spec home inventory that they still need to work through. And we've got sales in the new home market that are up just about 2 % year to date. So it's taking a little bit longer to clear that inventory. You know, now the large public home builders have done a pretty good job in drawing down their complete home inventories. Of course, they've had to remain pretty aggressive in their use of incentives to do so. But we are starting to see more of a shift away from that spec production model, which is building the home before you have a buyer.

3:45You know, many of the builders are looking for a better balance. So what they're trying to do is basically match production with the sales pace rather than putting more specs into a slow market. Sounds like that speaks to an overall trend of the home market in general moving away from buying toward renting. Is that kind of what you're pointing to as an overall trend here? Yeah. So I think when you look at the for sale market relative to rentals, when you think about affordability, the high price of the homes, mortgage rates back towards 7%, you know, the math certainly does favor renting over owning.

4:22We've done some survey work that shows the same. And it's not that current renters don't want to own, but we find a majority of them do. It's simply the economics of it don't make sense right now. So what does that do for the overall sentiment in the home building market when we're seeing a trend toward more of those multifamily projects as opposed to the single families that you would think have better profit margins? Well, it's a good question. And, you know, I mentioned that in the new home market, we have sales paces down significantly from last year. The market as a whole is up only about 2 % year to date.

5:02And really the way builders are having to grow is to expand their community count. So they're not seeing it on the pace side, but really by increasing the number of subdivisions that they're operating from. So it's really a tough growth environment on the single family side. And if you think about the market, certainly there are pockets of relative strength and relative weakness. When you think about the entry-level buyer who is typically someone that may be coming out of a rental situation, we see more stress, as you would expect, across that part of the market because those tend to be the most price-sensitive homebuyers.

5:41On a relative basis, we have seen more strength at the move-up in luxury segments. These are typically the buyers that are coming out of an existing home, so they've built up equity over the last couple of years. In the luxury side, they're benefiting from the run-up in equity markets. They tend to be less sensitive to mortgage rates. We're seeing relative strength on that side. But there's really not a part of the market that is completely immune to what's happening in the broader economy, affordability, economic and political uncertainty. So there's broad challenges, but there are pockets of relative strength.

6:19Well, we are going to hear from one of those luxury home builders when Toll Brothers reports earnings this week. Are we expecting some positive signs there in terms of a lot of the factors you've just been talking about? Yeah. So we like the relative position of Toll Brothers. As you know, they cater to the luxury market, so their buyer is more affluent. As I said, the customers are less sensitive to interest rates compared to the entry level. About a quarter of their buyers paying cash. For those that do take out a mortgage, they put about 30 % down. So the buyer's very strong. So they're certainly more insulated to the macro.

6:56In terms of the upcoming print, I think the KPIs we'll be looking at are order growth and gross margin. And we particularly are interested in hearing how demand has trended intracurorder with mortgage rates climbing back up towards 7%. But that being said, we still expect toll to report high single digit growth in orders. And importantly, that's being driven, as we mentioned before, by community count growth, which is helping to offset muted sales absorptions. And that's really what sets Toll Brothers apart from a growth perspective, both for 2026 and looking out into 2027. Now, on the margin side, gross margins have been very strong.

7:36The outlook's really going to come down to how aggressive they've had to be on their use of sales incentives. Toll primarily prescribes to a price over pay strategy. So we do think that near-term margin should hold pretty well. Thank you for this, Drew. Great having you on with us. That's Drew Redding, U.S. Homebuilding Analyst for Bloomberg Intelligence. Let's take a look now at some stocks making news in the week ahead. I'm Nathan Hager, joined by Bloomberg Equities reporter Avalon Purnell. We're sort of winding down earnings season here, Avalon, but we're going to hear from some of the biggest names in big box retail this week, starting with Target on Wednesday.

8:14There has been a lot of drama around this stock. What are we expecting this week? Absolutely. We're definitely going to get a lot of visibility on the state of the American shopper. Sales trends and progress on Target's broader recovery will definitely be top of mind for investors, especially as they head into their second quarter earnings next Wednesday. The company is still really trying to regain its sparkle and pinpoint what exactly made the company Targe as opposed to just Target. One thing of note, though, is that definitely analysts remain mixed on the company's performance moving forward, especially given guidance they had in their earnings call last quarter, noting that they did have a little bit of concerns about tougher comparisons moving forward.

8:53You have UBS's Michael Lasser remaining quite bullish, expecting the results to provide the next proof point that broader recovery may actually be sticking around for the company. Whereas Barclays, Seth Sigmund saying that, you know, meaningful upside to results will really be needed to push the stock from here. He notes also that he believes the big box store likely had a solid quarter. However, he still views improvement as just recovering from last year's issues as opposed to moving forward into the next chapter. So worth noting that the options data that we're currently seeing at the moment is implying about a 6.2 % move after those results.

9:30Well, you wonder if we're going to see something of a similar move from Walmart when they report on Thursday. day. If you think about some kind of indicator of the American consumer, it's hard to think of a company that's more of one than Walmart. Absolutely. And a similar story that we were seeing in Target definitely still playing a role here for Walmart as well. Analysts still quite mixed on how exactly this big box stores, e-commerce, and also delivery businesses will perform as they report second quarter earnings. KeyBank is expecting pretty healthy results from the store, noting that the company remains one of their top picks as growth initiatives and also further share gains continue to build momentum despite a fairly volatile macro and geopolitical environment.

10:16They also expect Walmart to be fairly vocal about how exactly they're using those tariff refunds to fund rollbacks and ultimately drive future business gains by bringing people back into the store with slightly lower prices. Others are not necessarily as rosy about the company's outlook. Barclays noting that the optics don't look too great given expectations for sales moderation from the last quarter. Barclays, though, still saying that they believe this could be the trough as price investments and other initiatives support accelerating share gains in the second half of the year. Worth noting, retailers are still expecting back-to-school sales and Black Friday, which obviously won't be penciled in for the start of the year.

10:55Right, but definitely something to keep an eye on as we wait to see what the outlook is going to be from both Target and Walmart. Also on Thursday, we're going to hear from one of the biggest names in the ag sector. What are we expecting from Deere and Company? Yes. Investors will be looking for more data that reinforces Deere's view that 2026 will be the trough, the bottom of this quite complicated situation for the company. The world's biggest farm machinery makers' second quarter results are expected to be slightly mixed again this quarter. Bloomberg Intelligence expecting the results to still reinforce that expectation that 2026 will mark a trough in large ag demand as attention shifts towards how fast will that recovery be next year.

11:41However, that analyst is also noting that they're still expecting large agriculture retail sales to remain quite soft, though they do appear to be tracking better than industry forecasts as inventories continue to normalize. RBC also highlighting that their big question is continuing to be what exactly does the pace of Deere's recovery look like, especially as there continues to be a lot of volatility in the macro environment and also the tariff situation that is somewhat improved, but still kind of in the balance. That's obviously kind of interesting, especially with the Iran war, in the background as to how exactly that's going to be impacting farmers who are continuing to struggle to manage prices, not necessarily keeping pace with very elevated cost in.

12:25The options market also continuing to price a potential move of nearly 5 % after the company reports earnings. Yeah, still a lot of back and forth when it comes to that situation in the Middle East and the post-tariff situation as well. Just time to talk about another stock that's reporting this week, Estee Lauder. There is a lot more competition in the beauty space. How are we thinking Estee Lauder is going to be handling it? There sure is. To say the least, this company has had a rollercoaster ride of a quarter. Just a couple of months ago, they were talking about merger talks with the Spanish brand Pooch, which was on the table and then later scrapped after investors were quite negative on that idea.

13:05And like a lot of other companies that we've already mentioned, they are in the midst of a broader recovery as consumers are continuing to kind of pull back from spending on these various luxury brands that are under the Estee Lauder umbrella. That being said, RBC does continue to favor their turnaround, noticing that potentially important brands continue to outperform. And they also noted that the broader turnaround at MAC continues to kind of bode well for the company, though they do still question how Estee Lauder will continue to fare with holding on to Smashbox and Too Faced, which are fairly popular brands amongst maybe millennial crowds, and whether it still makes sense for Estee Lauder to hold on to them or maybe look for a play to sell them at some point.

13:51We'll see. Yeah, we'll see if a lot of those sales are happening in Target as well. Thanks, Avalon. As always, good to have you, Liz. That's Avalon Purnell, equities reporter for Bloomberg News. And coming up on Bloomberg Daybreak Weekend, we'll look at whether Europe's future economic data can live up to the promise of a bumper second quarter when it comes to Europe's earnings. I'm Nathan Hager, and this is Bloomberg.

14:21Bloomberg Daybreak U.S. Edition is brought to you by OTC Markets Group. Thinking about joining the exploding overnight market space, but unsure where to start? Designed to meet the needs of a growing international investor base, OTC Markets' overnight platform for exchange-listed securities, Moon ATS, provides access to global securities in U.S. dollars from 8 p.m. to 4 a.m. Eastern, Sunday through Thursday. Extend your trading day and trade global securities in U.S. dollars through a FINRA-licensed broker-dealer. In the first half of 2026, over$28.1 billion U.S. dollars traded on Moon ATS. Learn more about Moon ATS.

14:59Visit otcmarkets.com slash moon. Moon ATS is operated by OTC Link LLC, a FINRA-registered broker-dealer. Get the latest news from around the world delivered to you in an instant. Subscribe to Bloomberg News Now and get news when you want it on your schedule. These are short audio reports on the day's top stories that you can listen to in just a few minutes. Make Bloomberg News Now your trusted source for the latest global headlines with context. It's available 24 hours a day, anytime you need it, right on your smartphone or smart speakers. Subscribe to Bloomberg News Now today on Apple Podcasts, Spotify, or anywhere you listen.

15:39This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington. Later in the program, we'll take a closer look at the fate of the Japanese yen, plus how Hong Kong's competitiveness as a financial center is about to be tested. But first, Europe's biggest economies report inflation and purchasing managers index data next week against a backdrop of geopolitical uncertainty and higher energy costs driven by the war in Iran. Let's get more now from Bloomberg Daybreak Europe anchor Stephen Carroll. Nathan, European economies and companies have defied the doom-laden forecast that the Iran war would tip the continent into stagflation.

16:19We've seen the best earnings season in nearly four years, pushing key stock indexes to new records. And the signals for the months ahead look strong too. In the coming days, PMIs and the ZEW survey in Germany will give fresh insight into how the biggest economies are performing, along with updated readings on inflation. And investors seem bullish on European stocks too. Benedicte Lowe is equity derivative strategist at BNP Paribas. Here's what she told Bloomberg's Tom McKenzie earlier this week. So it's undeniable that the macro story is speaking up in Europe. We've got growth that is surprising to the upside, activity on the rise, and earnings that have been good.

16:56Actually, earnings have been exceptionally strong in the US, but also very good in Europe. It's been one of the best earning seasons over the past few years. And all of this is happening in a context where positioning is low to neutral. So that points to a positive picture for stocks. Now, the counterpoint to that is that a lot of positive news is already in the price. And with seasonality that is not supportive for higher stock price up until the end of September, October, we like to position for what we call a grind higher in stocks. And we like to minimize the premiums that investors are spending on upside positioning.

17:30How do you mitigate the risks around inflation, whether it's soft commodities, whether it's diesel, whether it's gas, oil prices? If this is the status quo right now around Iran and that is prolonged, how do you hedge around that? So one of our top pick at the moment is the banking sectors. We think the banking sectors is one of the best sector positions for end of year. First of all, PMIs are on the rise, as I mentioned, activities picking up, earnings that have been good. But also higher inflation means higher rates. We're expecting the ECB to rise rates come September meeting. And that is positive for the banking sector, a cyclical sector that has, yes, really performed well over the past few years.

18:07But we think there's some upside for that sector. So, Benedict Lowe from BNP Paribas, optimistic there. But there are risks to the outlook, not least from oil and gas prices grinding higher. Let's discuss now with David Powell, Bloomberg's senior euro area economist, and Sagarika Jason Ghani, who covers EMEA Equities, macro and investment strategy. David, let's start with you. We're looking ahead to these economic surveys coming in the next few days. What are we expecting to learn about the state of Europe's biggest economies? Well, essentially, we're going to be focusing on the PMI survey. And that's going to give us indications to whether the strong growth that we saw the second quarter continued in the third quarter.

18:47Euro-area GDP extended by 0.4 % in the second quarter this year. That was basically double consensus. Part of that is because of a rebound in Ireland. But even without that distortion caused by Irish GDP, the economy probably would have expanded by about 0.3, which is above expectations and is certainly defying the negative forecasts or the gloomy forecasts that were put out after the sharp rise in commodity prices earlier this year. So, Agarika, we've just wrapped up, or we're just wrapping up rather, a very strong earnings season in Europe. But can you give us a sense of perspective on this?

19:27How good has it been when we look back at how European companies have reported? It's taken a lot of market participants, both investors and sell-side strategists, by surprise. And I want to put that in context a little bit, because European companies in the last two years have had essentially zero profit growth. And that was underpinned by poor economic growth, both a lot of it domestically. But this year, what happened was European stocks started off the year on a really solid footing, right? You had the AI trade cracking in the US. But at that time, Europe was turning attractive because it had these, there was a new buzzword on Wall Street at the time, it was called halo, heavy assets, low obsolescence.

20:06So suddenly the asset heavy, old economy stuff is becoming attractive. But before that could really take off, you had the US-Iran war. And that exposed a lot of European companies to the potential for higher oil prices. There were worries that European economies would tip into stagflation. So expectations had, on the macro front, been tempered a bit. But coming into the second quarter earnings season, analyst expectations were incredibly strong. Analysts were expecting MSCI Europe companies to post a 12 % increase in profits versus a year earlier. As I said previously, after two years of no growth, that was already a high bar.

20:48What's been astounding is that not only have the companies met that bar, they've actually beaten it by quite a wide margin. So they've posted 17 % increase in profits, and that's the best since late 2022. Of course, the economy has been surprisingly resilient to the oil price shock. We haven't quite seen that feed through to inflation to a degree that had been feared. So that's been underpinning that. But the really big takeaway for us this season has been that the typical pattern in a year is generally that analysts start the year really bullish. And then through the year, they downgrade earnings expectations.

21:27This year, it's been the opposite. Not only have they come in bullish, but they've actually raised earnings expectations for 2026 by 5%, which is really atypical. So that bodes well for further bullishness. Okay, I mean, the inflation concerns, David, really are central to what things look like for the rest of the year as well. We've talked about the resilience in the European economies that we've seen so far. But given that energy prices still remain elevated, how big is the inflation risk when we're thinking about the picture for the coming months? There were these fears of stagflation. We haven't had the stag, but we've had the flation.

22:01So if we look back at headline CPI in January, it was 1.7 percent. Commodity prices started to rise in February in anticipation of a conflict in the Middle East. And then when it actually began at the very end of February, commodity prices shot up. And the latest inflation reading is 2.9 percent, so well above the ECB's 2 percent target. And that is really what's driving the ECB's decisions right now. We expect another hike from the ECB in September, and that's universally expected by most economists and priced into the market. And really what's going to drive their decisions after that is how commodity prices are affecting inflation.

22:49And that, of course, is tied up with the outcome of the conflict in the Middle East. And no one can say with exact certainty where we're going to be at the end of the year in terms of that. But we're on track for another hike. And if this persists, we could have more tightening as the ECB worries about inflation. However, the good news is that core inflation is unlikely to rise as much. We have had some increase. things that are particularly vulnerable to commodity prices like airfares have gone up but the weakness in the labour market is unlikely to allow workers to ask for huge increases in pay that we saw after the pandemic that really boosted inflation keeping underlying inflation pressures limited this year.

23:40Indeed so the risk of a wage price spiral not looking looming large at the moment. Sagarika, in the earnings pictures, did we hear much from companies about their inflation fears? I think in terms of inflation, the sentiment from management has been really positive. They have sounded really confident on profit margins. And actually, a really key part of that, and this goes back to the AI story in the US, one of the other fundamental reasons why this bullishness toward European companies and the European stock market It is that changing attitude from investors on who are the next AI winners. So that was a key focus for how are companies in Europe being able to monetize productivity efficiency from AI.

24:23And we're seeing nascent signs of that now. Initially, in the first leg of the AI rally, it was all focused on the big spenders on AI, on developing AI. And those companies are based in the US. So Europe had been at a disadvantage then. It had underperformed US indexes because you don't have those big AI developers here. But what you do have are both sides of the other sides of that supply chain where you've got the semiconductor parts makers that allow for AI to be deployed. But you then also have companies, and Benedict was mentioning this earlier in her snippet, you have companies like banks who have already started to show that they can monetize AI in a way that is translating into earnings growth and margin growth.

25:06And they're confident that they can defend that going forward. So that's keeping optimism alive as well. What about the other asset classes? We're talking specifically about equities so far. But I mean, in terms of other European assets, are there interesting trends to be watching out for? Definitely. We were looking into this theme earlier with my cross-asset colleagues. And it's quite notable, economically speaking, or economically speaking, stocks and bonds generally behave in opposite directions. That's the fundamental rule of economics. This time around, we noticed that European stocks are rallying at the same time as there's growing bullishness on bonds.

25:46And the reason for that is that, and David mentioned this earlier as well, the economy is in a sweet spot at the moment where economic momentum is picking up from lows. So there's a Citigroup index which measures the degree to which data are coming in better than expected. And that economic momentum is the highest since March 2023. But at the same time, absolute growth figures are still trailing the US. And there is more policy certainty at the moment in Europe, or at least it's being viewed that way, versus the US. So investors are certainly bullish on stocks and bonds at the same time, which is really rare.